1031 Exchange

What Is A 1031 Tax Exchange?

All the people in United States know that the capital gains taxes can be a hard hit to the income of any person. If you know What Is A 1031 Exchange you can easily utilize it to save a lot of money that you would have otherwise had to pay as capital gains tax.

Section 1031 of the Internal Revenue Code of the United States allows any person who has invested in real estate to defer payment of his capital gains tax dues as well as a depreciation recapture tax dues. These taxes are levied on sale of the original property of that person which he has subsequently sold out. A number of people who invest in real estate are able to use this section and make changes in their investment portfolio. They do not have to bother about taxes involved.

In order to get the advantage of this section, you must purchase an IRS 1031 exchange property. The said transaction must be completed in a defined period. Section 1031 of the Internal Revenue Code also lays down the defined period. To begin with, you are given a time of 45 days. You have to earmark a set of three properties either of which you would purchase. The purchase of any of these earmarked properties must be completed within 180 days. Please note that the 45 days are included in the 180 days.

Apart from this you are also required to make sure that the reinvestment is at least 100% of the money that you earned after from the sale of property in your ownership earlier. You must keep in mind that if you fail to meet the 100 % investment criteria, the tax deferment would automatically become null and void.

The process involves a number of legal aspects. You would be required to take the assistance of a Qualified Intermediary. The Qualified Intermediary can be any person who is eligible for the role. Your lawyer, broker or accountant are not considered eligible, nor is an employee. The role of Qualified Intermediary is to take control of funds involved in the transaction. He is required to forward the money to closing agent who is selling the new property to you.

You must keep in mind that tax code of United States is a dynamic entity. The Internal Revenue Service, the Congress and the courts of United States can and frequently make amendments to the Internal Revenue Code according to their allocated powers. This means that what is correct today may not remain correct forever or the other way round.

Even if you are aware of what is a 1031 tax exchange, it is strongly recommended that you should take the assistance of your tax lawyer before you proceed in this direction.